2018 (2) TMI 433 - AT - Income Tax

Addition u/s 14A - earning of exempt income - suo-motu disallowance - Held that - As assessee has earned dividend income for which no disallowance has been made by assessee in the return of income filed, as per section 14A(1), computation has to be adopted as per Rule 8D of the Income Tax Rules,1963. On perusal of the computation made by the AO, it is observed that the disallowance made is more than exempt income. Hon ble Delhi High Court in the case of Cheminvest Pvt. Ltd. vs. CIT 2015 (9) TMI 238 - DELHI HIGH COURT wherein it has been held that disallowance under Rule 8D cannot exceed the exempt income. Therefore in our considered opinion the disallowance needs to be recomputed. As there are no expenses other than the expenses recorded in Schedule 10 to P&L account, we find it appropriate to restrict the disallowance to a sum of ₹ 10,000/- which could be attributed to earning of exempt income. - Decided against assessee.

Summary

Issues:
1. Disallowance under section 14A of the Income Tax Act, 1961.
2. Jurisdiction under section 14A read with Rule 8D.
3. Application of Rule 8D(2) of the Income Tax Rules, 1962.

Analysis:
1. The case involved a dispute regarding the disallowance of Rs.37,22,144 under section 14A of the Income Tax Act, 1961. The Assessing Officer (AO) observed that the assessee, engaged in the business of a Non-Banking Financial Company, had investments in shares and mutual funds, earning exempt dividend income of Rs.5,13,682. Despite the assessee's claim of no expenditure for earning this income, the AO computed the disallowance under Rule 8D at Rs.37,22,144. The CIT (A) upheld this disallowance, emphasizing the mandatory nature of disallowance under Rule 8D(2) for earning exempt income, regardless of actual expenses incurred.

2. The jurisdiction under section 14A read with Rule 8D was also challenged. The appellant argued against the assumption of jurisdiction by the AO under Rule 8D(2), contending that no borrowed funds were utilized for investments, thus no expenses were incurred for earning exempt income. However, the CIT (A) affirmed the AO's decision, stating that Rule 8D(2) mandates disallowance, irrespective of actual expenses, when there is investment in shares and mutual funds, akin to a wealth tax.

3. The application of Rule 8D(2) of the Income Tax Rules, 1962 was a crucial aspect of the judgment. The appellant contended that no direct expenses were incurred for earning exempt income, and the disallowance made by the AO lacked proper consideration. The Tribunal disagreed, noting that while no direct expenses were debited in the Profit and Loss account, certain financial charges were recorded. The Tribunal held that the disallowance must be computed as per Rule 8D, ensuring that it does not exceed the exempt income. Consequently, the disallowance was recomputed to a sum of Rs.10,000, attributing it to the earning of exempt income, and the appeal was dismissed.

In conclusion, the Tribunal's decision clarified the mandatory nature of disallowance under Rule 8D(2) for earning exempt income, emphasizing the application of the prescribed methodology despite the absence of actual expenses incurred by the assessee.